Dealing With Divorce

Divorce happens.

And in 2019, divorce happened for about 15 of every 100 couples.

But the arrival of the Covid-19 pandemic in 2020 forced many couples to press pause on breaking up.

Even after the removal of shelter-in-place mandates, managing divorce remotely without traditional in-person/in-court options discouraged many couples starting the break-up process. While estimates vary, divorce rates dropped by anywhere from 15% to 30% between 2020 and the end of 2022. 

But this year, things are different—the divorce rate isn’t just back at its pre-pandemic level, it’s above it. 

The disastrous decade…

Most divorces occur within ten years of the wedding, with the average marriage timeline prior to divorce being eight years. 

Using that as a starting point, let’s roll back the clock to 2016, roughly eight years ago. Americans were enjoying a ripping economy and historically low interest rates—rates we’d all enjoy until about January 2022 when the Federal Reserve started increasing the cost of borrowing.

That means today’s divorcing couples acquired their property at a time when it was far less expensive to finance a purchase. 

The complicating factor

Today’s higher cost of borrowing is a complicating factor for couples considering a divorce. Any couple that bought or refinanced (especially within the last three years) is likely to hold an interest rate of around 3%. That rate isn’t going to be matched by any lender in the current economic environment.

Which means…

• The spouse who gets to hold onto the shared property stands to get a great deal, while the other spouse is going to need to rent or buy, but at a much higher rate. 

OR

• Both spouses want to keep the house, so they end up duking it out in court over who gets to stay and who gets to go. 

Of course, the spouse forced by the court to leave the home can be bought out of their equity, but unless the remaining spouse possesses a ton of cash on-hand, they won’t be able to afford to buy out their ex. No one, and I mean no one, is doing cash-out refinancing right now at these interest rates. For most divorcing couples, that means right now is a time to get back to basics or get very creative. 

Back to basics

From a simplicity standpoint, nothing is easier than just selling and moving on.

List, sell, and split the equity (less any costs for repairs, staging, closing, etc.).

This isn’t a sexy choice, and it isn’t the most economical (especially if the divorcees need to finance the purchase of their next property), but it’s quick, clean, and simple. 

Even in this slow real estate environment, the chances are good that both divorcees will walk away with a sizable amount of cash due to the wild equity growth witnessed during the pandemic. 

Unconventional but convenient

Despite what Hollywood might lead you to believe, not all divorces are laden with animosity and spite. Sometimes there’s a lot of love left in the relationship, but the partners simply want different things and decide divorce is the best path forward. 

In these amicable-divorce scenarios, it’s not unheard of for the former couple to continue cohabiting the same space. In such a situation, the former pair simply become housemates, each with their own bedroom but sharing common areas (e.g. the garage, the living room, etc.) of the home. 

(I know, I know…it sounds weird. Maybe even impossible. But I can assure you that this really does happen. Sometimes former couples live together in the same space for more than a decade with no difficulty.) 

A creative solution to an unpleasant problem

When the two prior solutions don’t suit a divorcing couple’s situation, it’s time to get creative.

Here’s my favorite option:

The spouse who remains in the shared property buy’s the other spouse out of their equity and covers the difference in interest between the legacy rate offered on the original mortgage and today’s market rate for the remaining life of the loan. 

So, if the home was purchased three years ago with a rate of 3%, and today’s rate is 8%, that  5% difference will be amortized over the remaining 27 years left on the loan and paid for by the spouse staying in the home. 

Here’s what that might look like…

Let’s pretend a couple bought a home in November of 2020 for $1,000,000, putting 20% down at the time ($200,000). The monthly mortgage payment for the $800,000 borrowed is $3,373. 

But at today’s 8% interest rate?—The monthly payments on the same $800,000 are an eye-popping $5,870, which means each it costs $2,007 MORE per month to borrow the same amount of money. 

To make it work, the spouse that decides to stay in the home will need to cover the difference in 27 years (remember it was bought in November 2020) of interest payments at the historic low rate of 3%. That amounts to 324 more payments of $2,007 totaling $650,258, half of which will be paid out to the spouse vacating the property to offset the cost of buying in the current borrowing environment. 

Combined with the increase in equity of the home (let’s pretend it’s now worth $1,300,000), the spouse who remains will need to come up with $475,129 to buy their ex out ($150,000 for the growth in equity and $325,129 for the higher cost of financing). 

Footing a big bill

Don’t be fooled—coming up with nearly $500,000 in cash to preserve a 3% interest rate and obtain full control of a property is no easy task for most people.  

That being said, it’s also not impossible.

The big takeaway isn’t whether you can or can’t afford to buy your ex out of a shared property.

The big takeaway is that getting a divorce doesn’t need to equate to selling a cherished piece of property. For those divorcing couples willing to think outside the box, there are alternative paths to take. 

If you’re in the midst of a divorce and want to discuss potential options for your shared property, please know that my door is always open. Give me a call at 310-853-0335 or shoot me an email at ShannonShue@KW.com. Similarly, if you’re thinking about getting a divorce and would like to speak with an attorney, please let me know—I work with a number of attorneys and I’d be more than happy to make an introduction.

Until next time…

– Shannon